Oligarchs and money

Published April 8, 2014 - 1:03am

By PAUL KRUGMAN

Econonerds eagerly await each new edition of the International Monetary Fund’s World Economic Outlook. Never mind the forecasts, what we’re waiting for are the analytical chapters, which are always interesting and even provocative. This latest report is no exception. In particular, Chapter 3 — although billed as an analysis of trends in real (inflation-adjusted) interest rates — in effect makes a compelling case for raising inflation targets above 2 percent, the current norm in advanced countries.

This conclusion fits in with other IMF research. Last month, the fund’s blog — yes, it has one — discussed the problems created by “lowflation,” which is nearly as destructive as outright deflation. An earlier edition of the World Economic Outlook analyzed historical experience with high debt, and found countries willing to let inflation erode their debt — including the United States — fared much better than those, such as Britain after World War I, that clung to monetary and fiscal orthodoxy.

But the IMF evidently doesn’t feel able to say outright what its analysis clearly implies. Instead, the report resorts to euphemisms that preserve deniability: The analysis “could have implications for the appropriate monetary policy framework.”

So, what makes the obvious unsayable? In a direct sense, what we’re seeing is the power of conventional wisdom. But conventional wisdom doesn’t come from nowhere, and I’m increasingly convinced our failure to deal with high unemployment has a lot to do with class interests.

First, let’s talk about the case for higher inflation.

Many people understand a falling price level is a bad thing; nobody wants to turn into Japan, which has struggled with deflation since the 1990s.

What’s less understood is there isn’t a red line at zero: an economy with 0.5 percent inflation is going to have many of the same problems as an economy with 0.5 percent deflation. That’s why the IMF warned “lowflation” is putting Europe at risk of Japanese-style stagnation, even though literal deflation hasn’t happened (yet).

Moderate inflation turns out to serve several useful purposes. It’s good for debtors — and therefore good for the economy as a whole when an overhang of debt is keeping back growth and job creation. It encourages people to spend rather than sit on cash — again, a good thing in a depressed economy. And it can serve as a kind of economic lubricant, making it easier to adjust wages and prices in the face of shifting demand.

But how much inflation is appropriate? European inflation is below 1 percent, which is clearly too low, and U.S. inflation isn’t that much higher. But would it be enough to get back to 2 percent, the official inflation target in Europe and the United States? Almost certainly not.

You see, monetary experts have long known about the case for moderate inflation, but in the 1990s, when the 2 percent target was hardening into policy orthodoxy, they thought 2 percent was high enough to do the job. In particular, they thought it was enough to make liquidity traps — periods when even an interest rate of zero isn’t low enough to restore full employment — very rare. But the United States has now been in a liquidity trap for more than five years. Clearly, the experts were wrong.

Furthermore, as the latest IMF report shows, there’s strong evidence changes in the global economy are increasing the tendency of investors to hoard cash rather than put funds to work, thereby increasing the risk of liquidity traps unless the inflation target is raised.

But the report never dares to say this outright.

So, why is the obvious unsayable? One answer is serious people like to prove their seriousness by calling for tough choices and sacrifice (by other people, of course). They hate being told about answers that don’t involve more suffering.

And behind this attitude, one suspects, lies class bias. Doing what the United States did after World War II — using low interest rates and inflation to erode the debt burden — is often referred to as “financial repression,” which sounds bad. But who wouldn’t prefer modest inflation and a bit of asset erosion to mass unemployment? Well, you know who: the 0.1 percent, who receive “only” 4 percent of wages but account for more than 20 percent of total wealth. Modestly higher inflation, say 4 percent, would be good for the vast majority of people, but it would be bad for the superelite.

And guess who gets to define conventional wisdom.

Now, I don’t think class interest is all-powerful. Good arguments and good policies sometimes prevail even if they hurt the 0.1 percent — otherwise we would never have gotten health reform. But we do need to make clear what’s going on, and realize in monetary policy as in so much else, what’s good for oligarchs isn’t good for America.

Paul Krugman is a syndicated columnist who writes for the New York Times News Service.

Rules for posting comments

Comments posted below are from readers. In no way do they represent the view of Oahu Publishing Inc. or this newspaper. This is a public forum.

Comments may be monitored for inappropriate content but the newspaper is under no obligation to do so. Comment posters are solely responsible under the Communications Decency Act for comments posted on this Web site. Oahu Publishing Inc. is not liable for messages from third parties.

IP and email addresses of persons who post are not treated as confidential records and will be disclosed in response to valid legal process.

Do not post:

Potentially libelous statements or damaging innuendo.

Obscene, explicit, or racist language.

Copyrighted materials of any sort without the express permission of the copyright holder.

Personal attacks, insults or threats.

The use of another person's real name to disguise your identity.

Comments unrelated to the story.

If you believe that a commenter has not followed these guidelines, please click the FLAG icon below the comment.